Avoid Mortgage Fraud

Avoid Mortgage Fraud (edit/delete)
Mortgage fraud has many guises

by Lisa Fleisher/The Star-Ledger Sunday July 05, 2009, 10:15 AM

As the economy changes, so do the ways people try to make a quick -- and sometimes criminal -- buck.

In response, state and federal agencies are ramping up efforts to track down and prosecute people who committed fraud that hurt major financial institutions and everyday homeowners.


There's no single crime known as "mortgage fraud." Instead, people are charged with crimes such as mail fraud or identity theft. The height of the fraud activity might have taken place two or three years ago, but the prosecution is just ramping up.

The FBI created a national mortgage team in December and more than doubled the agents devoted to this type of crime.

Here's a primer to the types of mortgage fraud that are out there, how to get help and what it all means to you.

GLOSSARY

mortgage: Loan used to buy a home.

mortgage-backed security: Financial instrument that allows investors to buy shares in a fund that combines many mortgages into one pool.

straw buyer: Person named on mortgage documents but who is not really the intended homebuyer; often used when the actual buyer does not have good enough credit or high enough income.

equity: Money built up in the house by paying into the mortgage. For example, a person who made $100,000 in mortgage payments on a $300,000 loan has $100,000 in equity in the house.

shell company: Company set up for a single purpose. In our context, fraud.


WHY I SHOULD CARE

Mortgage fraud deflates property values across the board, destabilizes banks and
can ultimately put greater stress on our social safety nets by leaving victims destitute. Fraud often results in foreclosure, which pushes down neighboring home prices, can chip away at the town's tax base and strains municipal resources.


TYPES OF MORTGAGE FRAUD

INCOME AND EMPLOYMENT FRAUD

Method: Perhaps the most prevalent, either homeowners lie about their income or loan brokers coerce or flat-out falsify documents to get a loan approved.

Result: Homeowners end up with loans they can't afford.


REVERSE MORTGAGE FRAUD

Method: Elderly people who might have lost retirement funds sometimes turn to a reverse mortgage, which allows them to take a new mortgage out on a house they've already paid off. While this is sometimes a helpful tool, industry watchers and government officials warn about people charging sky-high fees.

Result: Elderly people are either cheated by high fees or, in worst-case scenarios, lose their house because they signed documents they did not understand.


PHANTOM HELP

Method: A type of foreclosure rescue scam in which a fraudster collects an upfront fee from homeowners trying to save their homes from foreclosure -- and then disappears.

Result: Criminals do nothing and pocket the fee.


MORTGAGE-RELATED IDENTITY THEFT

Method: Perpetrators use stolen identities to buy properties outright or take out mortgages.

Result: Victims find out they are on the hook for mortgages and loans.


SHORT SALE FRAUD

Method: A buyer colludes with real estate agents or others to give faulty appraisals to banks and convinces them a property is worth less than it is.

Result: Banks are defrauded and surrounding property values can drop.


BAIT AND BUMP

Method: Lenders or brokers dangle attractive loans in front of desperate homeowners. But when it comes time to close, buyers are told it's too late to switch.

Result: New homeowners are left with mortgages they can't pay or end up signing away their homes.


EQUITY STRIPPING OR SKIMMING

Method: There are several definitions for this, one of which is synonymous with lease buy-back (see below). Another iteration is when a fraudster convinces people to invest in or buy properties, using their credit to get loans for inflated property values, but walks away.

Result: Investor or group of investors is left with properties, which often have been neglected and have gone into foreclosure.


LEASE BUY-BACK

Method: Homeowners facing foreclosure sign over the deed to a company or individual who promises to sell it back after a year, during which the homeowners can get their finances in order. In the meantime, they are told they will be allowed to rent the house.

Result: The scammer evicts the original homeowner-turned-renter and keeps or sells the property.


HOW DO I AVOID BECOMING A VICTIM?

• Be skeptical of people who make unsolicited contact.

• Don't hesitate to ask as many questions as you need until you understand what you are signing.

• Don't sign blank forms.

• Check to make sure your name is correct on documents and matches your identification.

&bull Check mortgage agent, real estate agent and lawyer's certifications through state agencies.

• Review the value of the home by comparing it with others nearby, and go over the sales history of the home to see whether the value has been inflated through multiple sales.

• Remember, if it's too good to be true, it probably is.


Q&A

Q: Are frauds like these new?

A: No, many of these methods have been around for decades.


Q: Why are we just hearing about them now?

A: A few reasons are often cited: The falling economy strips away the financial cover some of these perpetrators may have had, leaving more people with mounting losses; companies are reporting fraud more frequently; state and federal agencies are stepping up enforcement.


Q: Are the victims always innocent?

A: No, sometimes -- but not always or often -- victims can be partial participants. They get a cash payment and do not ask questions or agree to falsify information. The key, however, is that the licensed professional who ought to know better is helping them along.


Q: Does a prosecution prevent a company from doing business?

A: Not necessarily. Unless there is an injunction, the companies might be able to solicit customers and operate websites until proven guilty or until their licenses are stripped away.


Q: What is being done?

A: A half-dozen federal agencies are investigating these frauds -- including the FBI, the Secret Service, the Department of Housing and Urban Development and the IRS. So are states' attorneys general. The number of FBI special agents assigned to mortgage fraud increased to 250 in February, from 120 in 2007, and Congress is considering adding $35 million to the FBI's budget for this type of fraud detection.

New Jersey Attorney General Anne Milgram said her office is using civil cases to go after suspected criminals, because civil cases can be brought more quickly, but might follow up with criminal charges. Also, she said she told the Division of Consumer Affairs to look into TV and radio commercials making debt relief or foreclosure relief claims.


Q: Why aren't banks doing more?

A: Some say the banks do not want to investigate their own loans for fear it will taint them or open them up to lawsuits because their loans have been packaged into mortgage-backed securities made with certain promises against fraud.


Q: Why aren't more of these cases being prosecuted?

A: Criminals can be difficult to pin down, since many businesses have gone bankrupt or perpetrators have skipped the state.


WHERE SHOULD I GO FOR HELP?

Contact the New Jersey Division of Consumer Affairs at (800) 242-5846 for in-state callers and (973) 504-6200 from out of state; or visit njconsumeraffairs.gov.

If you are facing foreclosure, visit a U.S. Department of Housing and Urban Development-approved counselor. For a list, visit the real estate blog at nj.com, call (888) 989-5277 or go to NJForeclosureMediation.org.

Sources: N.J. Attorney General's Office; FBI; Mortgage Asset Research Institute; Interthinx